KERRY O'BRIEN: To say the least, it is a week of mixed signals for the economy.

So far we have seen the Reserve Bank say the economy is slowing, two new surveys of business and consumer sentiment showing significant declines, and one even expressing a fear of recession next year, plus a series of factory closures in Victoria leading to more than 600 job losses.

In the latest announcement today, South Pacific Tyres (SPT) - a joint venture between Australia's Pacific Dunlop and Goodyear of the US - said it was pulling out of making truck tyres in Melbourne and would make 500 people redundant.

But this afternoon, the Howard Government revised its forecast of economic growth upwards from 3.75 per cent to 4 per cent.

The new forecast adds $1.5 billion to this year's Budget surplus, which now stands at $4.3 billion.

And the Government has also revised its forecast, pushing unemployment down by the end of this financial year.

In a moment I'll be talking to the Federal Treasurer Peter Costello about the hot and cold economy.

But first, this report from business and economics editor Alan Kohler.

ALAN KOHLER: Listening to an upbeat Treasurer, Peter Costello, delivering the mid-year fiscal review today, you wouldn't know another factory had just closed in Victoria, with the loss of 500 jobs.

UNION REPRESENTATIVE: South Pacific Tyres has just announced that 500 manufacturing jobs will be gone by Christmas.

This is devastating for our membership.

Or that the gloomiest survey on business confidence for nine years has raised the 'r' word - recession - for the first time since the beginning of the 1990s.

DR DUNCAN IRONMONGER, DUN & BRADSTREET: If this continues, then we're looking at the sort of conditions we had prior to the 1991 recession.

In fact, if anything, this decline in the level of expectations - short-term expectations - has been faster than it was then.

ALAN KOHLER: Or that the building industry has fallen into one of its deepest ever holes.

BRIAN WELCH, MASTER BUILDERS ASSOCIATION: From the activity levels from a few months ago, the activity level has halved.

We're down 46 per cent of what the activity was a few months ago.

ALAN KOHLER: In fact, while the Government revises its estimate of economic growth upwards from 3.75 per cent to 4 per cent for the current financial year, most economists are revising their forecasts downwards.

ALAN OSTER, NATIONAL AUSTRALIA BANK: I would not be revising it upwards.

I think most of the risks are on the down side.

It's difficult to say, for sure, and there's always the potential that if the Government spends more than we expect they'll spend, then they'll get there.

But on terms of looking at the domestic economy and the international economy, you would want to be revising your forecasts down, not up, in the current environment.

ALAN KOHLER: The workers who'll be laid off at the South Pacific Tyres factory at Somerton certainly won't be revising their growth forecasts upwards.

ROBERT McENIRY, SOUTH PACIFIC TYRES: Today, SPT will be putting in place a plan for the cessation of one of the product lines at the Somerton plant.

The numbers that this impacts at that site, or in total across our Melbourne facilities, will be some 495 people will be made redundant.

ALAN KOHLER: If you're confused about all this, you're not alone.

The domestic economy is definitely slowing, and parts of it like housing and retailing are going backwards.

But what allows the Government to increase its forecast of economic growth and, therefore, the Budget surplus is the fact that exports are booming, and we all know what's causing that - it's the weak Australian dollar.

So in a way, today's mid-year economic review from the Government is merely the silver lining of a dark cloud.

KIM BEAZLEY, OPPOSITION LEADER: It begs the question which is being asked by many people of me, if the economy is doing so well, how come me and my family don't benefit?

ALAN KOHLER: Can you understand people being very confused?

I mean, the Government seems to be forecasting an increase in its growth forecasts and you're talking about a recession?

DR DUNCAN IRONMONGER: We're just raising the possibility because the business itself has told us it's not looking so healthy.

ALAN KOHLER: Maybe it means the Government is wrong?

DR DUNCAN IRONMONGER: Maybe it means that the forecasts are too strong and, of course, these indicators of business and consumer sentiment are important factors, otherwise they wouldn't be so eagerly sought as the phone calls from the Reserve Bank this morning proved.

CHRIS RICHARDSON, ACCESS ECONOMICS: You're not going to get a recession in Australia given we've had such a large tax cut and given that the Australian dollar is as competitive as it's been in many years.

However, I'm not sure that the Government should be quite as confident of the 4 per cent growth it's looking for.

I suspect that things post-GST and post-Olympics in retail and in housing may just keep growth down to a little lower than their current expectation.

ALAN KOHLER: And speaking of the Olympics, it seems that the impact of those two weeks in September on the economy were not as beneficial as might have been thought.

Did the Olympics make things worse or better for retailers?

ALAN OSTER: Clearly made things worse.

What surprised us is that it hasn't actually recovered in October.

And it's not just for retailers as well, we saw a lot of small manufacturing close down and you saw capacity utilisation levels fall 2 per cent.

Normally they move up and down by 0.1 per cent or 0.2 per cent.

Where we've ended up a month or two after the Olympics, is a clearly slower rate of growth in the domestic economy than what we had leading into the Olympics.

KATIE LAHEY, NSW CHAMBER OF COMMERCE: Certainly the retailers did have a very patchy result.

Some of them that were absolutely on the foot traffic path of the main Olympic visitor routes did very nicely.

Others didn't fare well at all.

But we've seen already a lift in our tourism industry because of the Olympic Games.

Certainly we've won many convention bids on the back of the Olympic Games.

ALAN KOHLER: Even if the economy does fail to grow as fast as the Government is now forecasting, its revenues will be protected by the GST and the new tax system.

CHRIS RICHARDSON: Now, the Government hasn't factored in an enormous amount of extra revenue from that.

It won't particularly help this year, but it will help down the track.

By next financial year, the Budget may be healthier still than the Government has admitted to today.

KIM BEAZLEY: One thing the news today confirms is that John Howard can keep his promise.

He can get the GST price impact out of the price of petrol, and he won't do it.

We have the clear-cut evidence now.

There's over $400 million available from increased petrol taxes.

He could do it.

ALAN KOHLER: But while there's extra revenue from oil company profits through the resource rent tax, the flat rate petrol excise does not change as the price of fuel goes up.

PETER COSTELLO, TREASURER: In fact, you'll see in these Budget papers that because volumes, sales volumes are going to be less than expected at Budget time, the actual excise take has been revised downwards.

ALAN KOHLER: That won't stop state premiers and motoring groups keeping up the pressure on petrol excise.

It all just highlights the fact that through a combination of good management, good luck and a low dollar, the Howard Government is in the happy position of going into an election year wondering what to spend all its money on.

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